Thursday, 29 November 2012

"Standards, Essential Patents and Antitrust" is the Editorial in the current issue of the Journal of European Competition Law & Practice (JECLP), Authored by Jorge Padilla (Senior MD and Head, Compass Lexecom), it visits a subject that has frequently been addressed in this weblog: the unhappy relationship between patent incentives and competition rules when it comes to FRAND ("fair, reasonably and non-discriminatory") licence terms. IP Finance thanks Oxford University Press, publishers of JECLP, for permission to reproduce it here:

"Standard essential patents (SEPs)—patents that read on a standard and are declared essential to practising that standard by their owners—have attracted the attention of competition authorities all over the world. The alleged abuse of the market power conferred by SEPs was the core issue investigated by the US and EU competition authorities in relation to Rambus's conduct; it was the chief concern behind DG Comp's investigation of Qualcomm's licensing practices; it was considered by the US and EU competition authorities when reviewing the merger between Google and Motorola and the recent patent aggregation mergers involving, among others, Nortel's patent portfolio; and, of course, it is centrestage of the ongoing reviews of Samsung's and Motorola's licensing practices.

What explains the recent popularity of SEPs with the competition agencies? First, standardisation plays a key role in several industries; most prominently in the telecoms, software, and hardware industries. Second, the number of patents in some standardised industries has grown very significantly. Third, many of those patents have been declared essential to practising standards. Fourth, some competition authorities have concluded that (a) standardisation restricts competition and thus creates market power and (b) SEP ownership automatically confers dominance. And, lastly, standardised industries are populated by asymmetric companies: some of them have SEPs while others don't; some of them are pure innovators while others are pure implementers and yet others are vertically integrated. Asymmetry engenders dispute and dispute attracts regulatory attention when regulators are persuaded, as some appear to be, that commercial courts are likely to be unable to deal effectively with the complexities of SEP pricing and non-pricing disputes.

In short, there are many SEP cases because there are many SEPs, SEPs are regarded as sources of market power, licensing SEPs give rise to bitter commercial disputes with potential exploitative and exclusionary implications, and some companies and competition authorities regard antitrust intervention as the most effective and efficient route to solving those disputes. It is considered most effective because the deterrent effect of antitrust precedents is thought to be considerably higher than that of court decisions, and it is considered most efficient because competition authorities have considerable investigative resources that need not be available to courts. More importantly, competition authorities may be keen to intervene in SEP matters because they are sceptical about the ability of private enforcement to produce desirable outcomes from a public interest or consumer welfare viewpoint.

These cases are highly complex because they involve a difficult trade-off. On the one hand, patent protection may lead to excessive prices and may also be used to exclude competitors anticompetitively. On the other hand, the raison-d'être of patents is to promote innovation. So these cases are difficult because they can cause both type I and type II errors. They are also complex because they involve difficult questions that have been hitherto insufficiently researched by lawyers and economists. For example, what is a FRAND royalty rate? There is no consensus. Are preliminary injunctions in patent disputes involving SEPs anticompetitive and/or inconsistent with FRAND commitments? There is no consensus on this question either.

To be fair, there is not even a consensus on the degree of complexity of these matters. Some commentators are convinced that intervention against SEPs entails no welfare downside. They believe that FRAND royalties should always be kept low or very low. They believe that the bargaining power of SEP owners should always be limited and, therefore, no preliminary injunctions should ever be awarded in SEP disputes. Those who argue in this way justify their claims on the widely held view that patent systems, and in particular, the US patent system, produce too many weak patents (ie, patents which should never have been granted in the first place) and that, as a result, they chill rather than foster innovation. These commentators seem to believe that the sins committed by the Western patent system can only be atoned for with the help of the competition authorities.

I have some concerns with this view, which in my opinion is extreme. Most importantly, not all patents are identical. Some, possibly too many, patents may be weak but there are other patents that are deservedly awarded. Such strong patents do protect and promote innovation. FRAND royalties for those patents should not be constrained by competition rules designed for a world of weak patents. Likewise, there is in my opinion no justification for adopting a per se rule against preliminary injunctions for SEP owners, because that rule would inefficiently shift bargaining power away from holders of strong SEPs. It is not true that intervention in SEP cases entails no risk of false positives. Both those who question the right of competition authorities to intervene when intellectual property rights are involved, and those who maintain that patents necessarily do more evil than good, are outside what I consider the reasonable spectrum of opinion. Competition agencies reviewing licensing practices in standardised industries should steer their way so as to avoid those extremes. They have a daunting job ahead: ensuring that antitrust and IP law complement each other to the ultimate benefit of consumers".

This blogger is pleased to see this call for moderation and common sense in dealing with standard-setting patents coming from an economist on the "other side", as it were, rather than from the serried ranks of do-or-die pro-IP apologists.